3 High-Risk Stocks That Could Break Out in 2018

Big risks can lead to big rewards

When investing, you almost always want to play it safe. The less risk, the better.

But with mitigated risk comes mitigated reward. Investing in The Coca-Cola Co (NYSE:KO) or AT&T Inc. (NYSE:T) is very low risk. The companies have massive moats, a long-term track record of success, not much volatility in the business, and they each pay huge dividends. But over the past 5 years, T stock has seen virtually no change while KO stock is up 13%.

By comparison, the S&P 500 is up more than 75% over the past 5 years.

In that time frame, certain high-risk stocks have done much, much better. Just look at Netflix, Inc. (NASDAQ:NFLX), which over the past several years has gone from a company losing subscribers after splitting apart the DVD and streaming businesses to a company dominating the secular growth over-the-top television market. Or look at Amazon.com, Inc. (NASDAQ:AMZN), which has gone from a money-losing, digital commerce operation to a money-making, multi-faceted business with multiple growth levers.

Over the past 5 years, NFLX stock is up more than 1,000% while AMZN stock is up more than 450%.

In other words, it’s okay to sate your risk appetite every once in a while and invest in riskier, more volatile high-risk stocks with potentially astronomical payoffs.

Which stocks today could be like buying NFLX or AMZN 5 years ago? Here’s a list of my three favorite high-risk stocks that could break out this year.

3 High-Risk Stocks That Could Break Out in 2018:

Source: Shutterstock

Snapchat (SNAP)

One could make the argument that social media company Snap Inc (NYSE:SNAP) has already broken out this year. After all, the stock soared from $14 and $20-and-up after the company reported robust fourth quarter numbers that blew expectations out of the water.

But those robust numbers did much more than just top estimates. Alongside an app redesign optimized for monetization, the strong fourth quarter report laid the groundwork for Snapchat morphing into a go-to digital advertisement destination for small-to-medium sized advertisers seeking max engagement among the trend-oriented, 12-to-30 year-old demographic.

Before the redesign and the fourth-quarter report, Snap stock was reeling. The company’s user growth was slowing. As was revenue growth. Losses were widening. Unit revenue trends were ugly. It looked like Instagram was just eating Snapchat’s lunch.

But the Q4 report showed that once Snap figured out its Android app, user growth picked back up. It also showed that once Snap figured out auction based advertising, ad-revenue growth picked back up. In combination, the report showed that demand for Snapchat advertising space is robust among smaller advertisers, and as long as user growth persists (which it should thanks to the Android ramp), Snapchat ad demand will only grow.

I easily think this is a $40 stock in 5 years. But the path to $40 won’t be easy. Big risks remain in the form of competition from Facebook Inc (NASDAQ:FB) and Alphabet Inc (NASDAQ:GOOG). User growth internationally remains a pretty big question mark, as does sustainable profitability in a long-term window.

But if you are willing to swallow those risks, Snap stock could yield handsome rewards in the long term.

3 High-Risk Stocks That Could Break Out in 2018:

Source: Energous

Energous (WATT)

Wires suck. Especially when it comes to charging. It seems like there are never enough cords. And even when there are, those cords are either too long or too short or don’t work. Because of this, wireless charging will be a huge thing in the future. And whoever ends up perfecting and commercializing a wireless charging product will be a big winner.

Right now, the front runner in that race is Energous Corp (NASDAQ:WATT). WATT is developing a system which uses radio frequencies to transmit power to chargeable devices like smartphones and watches. The technolog, called WattUp, is considered unprecedented because it is truly wireless. There aren’t any cords or charging pads — your device simply charges by being within the charge zone radius of the central charging device.

In late 2017, WATT received FCC approval of its WattUp Mid Field transmitter, marking the first time that the FCC had approved power-at-a-distance wireless charging under the more strict Part 18 of the FCC’s rules. That paved the path for commercialization. Now, in early 2018, WATT is already taking pre-orders for the first WattUp consumer products.

If this WattUp technology takes off, the pay off to investors could be astronomical. We are talking about a $3 billion-plus and quickly growing wireless charging market that WATT is getting ready to massively disrupt. As of this writing, WATT’s market cap is under $500 million.

But the risks are also huge.

First, it’s unlikely that WATT will be the only player in this field. Competition will come, and likely from the biggest, most resourceful players in tech (namely Apple Inc. (NASDAQ:AAPL)).

Second, WATT has some credibility issues, as the company has consistently delayed production targets over the past several years. Third, insiders are selling in bunches, and that is never a good sign.

Also, being first isn’t necessarily a good thing. Before the iPhone, there was the Blackberry Ltd (NYSE:BB). Before Facebook, there was MySpace. And before the Apple Watch, there was Fitbit Inc(NYSE:FIT). History is full of examples like this.

Clearly, there are big risks to this growth narrative.

But if those risks prove to be moot points and WATT marches on to dominate the wireless charging industry, then WATT stock could explode over the next 5 years.

3 High-Risk Stocks That Could Break Out in 2018:

Shopify (SHOP)

Digital commerce solutions provider Shopify Inc (US) (NYSE:SHOP) makes this list because of its hyper-rich valuation. But outside of risks to a big valuation, there aren’t really any risks to the underlying Shopify growth narrative. Indeed, the most likely outcome for Shopify is that this company continues to ride secular tailwinds in digital commerce and cloud technology adoption to the tune of massive growth over the next 5-10 years.

For comparison purposes, I like to think of Shopify stock as an early-stage Amazon. While the two business models are completely different, the tailwinds propping up each business are identical.

Amazon made a killing by creating the world’s largest digital commerce shop, and then branching out and making the world’s largest public cloud business. Shopify operates more on the back-end, but it’s making a killing on similar trends.

Shopify provides back-end commerce solutions for digital retailers across the globe. In this sense, they are pure-play on digital commerce growth across retailers of all sizes. So long as retailers continue to build out their digital sales channels, demand for Shopify’s back-end solutions will grow.

Moreover, all of Shopify’s solutions are hosted on the cloud. In this sense, Shopify stock is also a pure-play on cloud adoption.

Consequently, it’s easy to see that the two tailwinds propping up Amazon stock (digital commerce and cloud) are the same two tailwinds propping up Shopify stock. Because Shopify (trailing revenues of $670 million) is much smaller than Amazon (trailing revenues of $180 billion), the growth runway for Shopify stock is much bigger and much longer.

The big risk here is that Shopify stock is already trading at 280-times 2019 earnings estimates. That’s a big multiple. But if you can stomach that big valuation, Shopify stock could deliver you huge returns in a 5-10 year window.

As of this writing, Luke Lango was long T, AMZN, AAPL, FB, GOOG, SNAP, and SHOP.